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Global foreign exchange volatility, ambiguity, and currency carry trades

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  • Asano, Takao
  • Cai, Xiaojing
  • Sakemoto, Ryuta

Abstract

This study investigates the relationships between currency portfolios and market conditions. We incorporate information on cross-sectional foreign exchange (FX) volatility and ambiguity to determine FX market regimes. Unlike previous studies, we find that high FX volatility leads to higher currency carry returns only when FX ambiguity is high, suggesting that investors avoid making trading decisions during these periods. As a result, the unwinding of currency carry trades, which is usually associated with high FX volatility and declining in carry trade returns, does not occur. We also observe that this pattern does not emerge in other currency portfolios.

Suggested Citation

  • Asano, Takao & Cai, Xiaojing & Sakemoto, Ryuta, 2025. "Global foreign exchange volatility, ambiguity, and currency carry trades," Journal of Banking & Finance, Elsevier, vol. 178(C).
    • Handle: RePEc:eee:jbfina:v:178:y:2025:i:c:s0378426625001281
    DOI: 10.1016/j.jbankfin.2025.107508
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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